Reauthorization Fight Looms for CFTC in 2013

In what promises to be a fierce fight over the direction of Wall Street regulation, Congress could revisit position limits and other controversial aspects of derivatives regulation in 2013, when lawmakers take up reauthorization of the CFTC.

Congress could revisit position
limits and other controversial aspects of derivatives regulation
as early as next year, when lawmakers take up reauthorization of
the U.S. Commodity Futures Trading Commission (CFTC), in what
promises to be a fierce fight over the direction of Wall Street
regulation.

"I believe the best course of action for position limits is
for the Commission to ask Congress for clarification during the
2013 reauthorization process and go back to the drawing board,"
CFTC Commissioner Jill Sommers said last week.

Efforts to rewrite parts of the Dodd-Frank Act on
derivatives might not stick to position limits. Criticising the
Commission's rulemaking to date, Sommers predicted:

"Unfortunately, we (or Congress, through reauthorization)
will most likely be re-writing many of our Dodd-Frank rules over
the next couple of years because they do not reflect the input
we have received from the market. To the contrary, we have
routinely rejected legitimate comments with little justification
to support our analysis."

The CFTC's new position limits rule was killed off last
month by U.S. District Judge Robert Wilkins, just two weeks
before it was scheduled to go into effect, when he ruled that
the Commission had failed to consider the "ambiguities" in the
statutory language before deciding to adopt the new regulation.

Wilkins' ruling upheld the status quo. The Commission is
free to continue enforcing federal position limits on
agricultural contracts.

But before it can impose similar limits on energy contracts
"it must bring its experience and expertise to bear in the light
of the competing interests at stake to resolve the ambiguities
in the statute."

It had always been expected that supporters of position
limits might go back to Congress to ask legislators to resolve
the ambiguities by removing the words "as the Commission finds
necessary" (7 USC 6a(a)(1)) and "as appropriate" (7 USC
6a(a)(3)) which the judge found unclear in the context of
Section 6a as a whole.

But Sommers is a Republican, close to the views of the major
commodity dealing banks and exchanges, who voted against the
imposition of position limits in 2011.

Her decision to raise the question of position limits in the
context of the agency's regular reauthorisation process suggests
opponents as well as supporters may try to secure amendments to
this and other aspects of the law next year.

REAUTHORIZATION PROCESS

Congress controls federal spending through a two-step
process: (1) Expenditure by agencies and programmes must be
authorised by law. (2) Appropriations legislation allows the
agency actually to withdraw money from the U.S. Treasury to
spend, or enter other financial commitments such as loan
guarantees.

Congressional power over appropriations stems from the U.S.
Constitution: "No money shall be drawn from the Treasury, but in
consequence of appropriations made by law" (Article 1, Section
9). It is therefore absolute.

But the authorization process stems from the internal rules
of the Senate and the House of Representatives, enforced by
points of order, so is more flexible.

No money can be spent without appropriations. But it is
possible to pass legislation appropriating money without it
first being authorized ("unauthorised appropriations").

Unauthorized appropriations are fairly common. In the fiscal
year ending on Sept 30, 2012, Congress appropriated $261 billion
for programmes and activities whose authorizations had expired,
including $31 billion for the National Institutes of Health, $10
billion for the Coast Guard, and $189 million for the Violence
Against Women Act, according to the Congressional Budget Office
("Unauthorized and expiring authorizations" January 2012).

The authorization and reauthorization process is therefore a
semi-compulsory bit of congressional procedure, used by
legislators to give directions to agencies on matters of budget,
organisation and programmes, and to enact substantive changes in
the law ("Overview of the authorization-appropriations process,"
Congressional Research Service, November 2010).

Jurisdiction over the annual appropriations process is
controlled by the powerful Appropriations Committees in both the
House and the Senate, and their 12 specialised subcommittees.

But responsibility for authorizing bills falls under the
jurisdiction of the regular standing committees with oversight
over each agency. In the case of the CFTC, reauthorization is
under the control of the House and Senate agriculture
committees.

A GOLDEN OPPORTUNITY

The most recent CFTC Reauthorization Act was approved in
2008, as part of the Food, Conservation and Energy Act (PL
110-246), passed by Congress over one of the very few vetoes
cast by President George W Bush.

It authorised appropriations for the next five years ending
on Sept 30, 2013. "There are authorized to be appropriated such
sums as are necessary to carry out this act for each of the
fiscal years 2008 through 2013" (Section 13104).

In theory, therefore, Congress needs to pass fresh
authorising legislation in the first part of next year.

Reauthorization is not absolutely essential, however, and
the deadline is a semi-soft one. Between fiscal 2006 and fiscal
2008, the CFTC relied on unauthorized appropriations, after its
previous authorization expired in 2005 and was not renewed until
2008.

The 2008 act also made a number of modest substantive
changes: clarifying the Commission's jurisdiction over retail
foreign exchange derivatives, adding some anti-fraud provisions,
and giving the Commission new powers over significant price
discovery contracts (SPDCs) which had previously been excluded
from its remit under the infamous Enron loophole.

Earlier reauthorisation laws were passed in 2000, 1995,
1992, 1986, 1983 and 1978; and many were used to enact changes
to commodities laws. The 2000 reauthorisation process culminated
in the enactment of wholesale reforms to derivatives regulation
in the form of the Commodity Futures Modernization Act (CFMA).

The need for fresh reauthorisation legislation in 2013 will
provide an ideal vehicle for both supporters and opponents to
reopen many contested parts of the Dodd-Frank law to force
changes in either the legislation itself or the way in which the
CFTC and other agencies enforce it.

BATTLE LINES ARE DRAWN

For critics, such as the International Swaps and Derivatives
Association (ISDA) and the Securities Industry and Financial
Markets Association (SIFMA), the reauthorisation process could
provide another venue to challenge the CFTC's recent
rulemakings.

Both organisations have already successfully challenged the
CFTC in court. The wider industry has been lobbying Congress
intensely for relief, as well as donating record amounts to
Republican candidates in the current election cycle who have
promised to repeal or amend Dodd-Frank.

For supporters of tougher regulation, on the other hand,
reauthorisation is an opportunity to reword aspects of the law
to give regulators a better chance of surviving legal
challenges.

In the event that Republican Mitt Romney wins November's
presidential election, a Romney administration would almost
certainly want to use the reauthorisation process to enact
changes to Dodd-Frank, possibly as part of a much bigger
promised overhaul of the law.

Romney's campaign has promised to "repeal Dodd-Frank and
replace (it) with (a) streamlined, modern regulatory framework".

In contrast, a re-elected Obama administration would push to
protect as much of the 2010 derivatives reforms as possible.

Both foes and supporters are likely to present a long list
of proposed changes. But with the House of Representatives
almost certain to remain under the control of the Republican
Party, and neither party likely to have 60 votes in the Senate
to over-ride a filibuster, any proposals are likely to generate
fierce and protracted argument.

If either side decides to push its most ambitious proposals,
the resulting battle could be almost as big as Dodd-Frank
itself.

(The author would like to thank the late Stephen Daggett of
the Congressional Research Service, who was kind enough to share
some his legendary expertise on the budget process over the last
15 years)